The Maryland Legislature passed Senate Bill 585, adding a new section to Md. Commercial Law Annotated Section 11-1605, “Bad Faith Assertions of Patent Infringement” That law was signed by the Governor and became effective June 1, 2014. That bill contains a litany of requirements to be met before sending a patent infringement letter to an accused infringer in Maryland. As a result of the bill, sadly, a patent rights holder needs to strongly consider NOT sending any pre-litigation letters, and instead, simply suing first. More on why that is an important consideration below.
SB 585 is one of many similar bills passed in several states, is aimed squarely at non practicing entities that assert allegedly unviable patents as a “shakedown” to extort license fees – also euphemistically labelled “patent trolls.” The problem is that not every non practicing entity is a “patent troll,” and diluting the right to enforce patents can have a negative impact on innovation. For a good article on why this may be a bad thing, see Inventing the Smart Phone: Why the ‘Trolls’ Were Saviors.
Bad faith assertion of intellectual property rights is nothing new in the law, the Supreme Court has addressed it numerous times. The Supreme Court settled a long standing issue under the Noerr-Pennington doctrine (the 1st amendment doctrine that determines when a person is validly exercising 1st amendment rights to petition the government for redress of grievances) in PREI, INC. v. COLUMBIA PICTURES, 508 U.S. 49. There, the Supreme Court held that “First, the lawsuit must be objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits. If an objective litigant could conclude that the suit is reasonably calculated to elicit a favorable outcome, the suit is immunized under Noerr, and an antitrust claim premised on the sham exception must fail. [n.5] Only if challenged litigation is objectively meritless may a court examine the litigant’s subjective motivation. Under this second part of our definition of sham, the court should focus on whether the baseless lawsuit conceals “an attempt to interfere directly with the business relationships of a competitor,” , through the “use [of] the governmental process–as opposed to the outcome of that process–as an anticompetitive weapon,” . This two tiered process requires the plaintiff to disprove the challenged lawsuit’s legal viability before the court will entertain evidence of the suit’s economic viability. ” While the Noerr Pennington Doctrine is most often applied in the context of antitrust law, the rule is one based on the 1st Amendment – and hence, applies across all rights-assertion scenarios, and is the Supreme Law of the land.
Pre-litigation demand letters are pre-cursors to effective petitioning of the government. Indeed, numerous cases have held that the the law favors dispute resolution, and favors the parties communicating before filing suit, in an effort to settle their disputes. However, under SB 585, engaging in those efforts could cost you $50,000 if you fail to comply with the requirements.
In general, SB 585 requires that a patent rights holder include in the letter several pieces of information (the patent holder’s real identity, the patent number, certain facts about the accused infringer), that the patent rights holder engage in specific analysis regarding infringement, and that the accused infringer be given a not “unreasonably short” time to respond. Further, the law requires that the demand be based on a “reasonable estimate of the value of the license.” As a practicing lawyer, I can tell you that if you put any two (or more) lawyers in the same room and asked them what a reasonable royalty was or what an “unreasonably short” period of time was – they would not agree.
If the patent rights holder gets it wrong in the letter, the risk is huge. The court can award 3 times “damages” (whatever that is in this context) or $50,000, and reasonable attorneys fees.
SB 585, while aimed at some of the more reprehensible “patent trolling” conduct in the news, is unfortunately a law that is going to promote patent rights holders to not engage in pre-litigation resolution effort, and instead sue. A person who sues still must engage in pre-litigation investigation to avoid numerous other bad faith litigation related remedies, like Fed R. Civ. P Rule 11 relief. However, that standard applies to the substance of the claim – not the demand for resolution – and is much harder for a defendant to meet.
SB 585 also appears to apply both prior to, and during litigation, so even making written offers of settlement during litigation is dangerous.
We strongly urge our clients who are considering sending patent enforcement/settlement letters to consider whether or not to do so. If they do, they need to comply with this law or risk severe penalties.
For more information, contact Mike Oliver